Industrial demand for physical commodities is expected to escalate as emerging economies continue to grow. Generally, commodities used in commerce and industry are produced in locations that are different from locations at which they are consumed. These commodities therefore are subject to being transported from the production locations via the shipping locations to the consumption locations. This transportation requirement causes the cost of commodities, in each location, to be affected by the cost of insurance and storage of that location and the cost of freight from and/to other locations. Together with the above, localized differences in supply and demand of a commodity will affect the price at which that commodity is traded in each location. Also, the time required for transportation and the complexity of the logistics involved in transportation will affect the cost of commodities in a particular location.
A great mass and correspondingly large volume of physical commodities that carry a locational premium are generally needed to achieve a size/amount that is worth trading via an ETF if compared to precious metals, which are generally more expensive for a comparable mass and volume. So, the amount, expressed in weight, of such physical commodities that carry a locational premium represented by an ETF is larger, heavier and more difficult to transport and store in a storage location such as a warehouse, as compared with precious metals. Thus, it is noted that the locational/geographical premium of such a physical commodity, that is valued in large physical quantities, a function of the time, expense and logistical challenges of transportation due to the fact that the commodity is heavy and difficult to move around, and in certain cases can be damaged through poor handling or is otherwise perishable. Generally, the physical commodity is produced in one location, shipped to a storage location such as a warehouse, and then is later moved to a new storage location where it is actually going to be processed or utilized (i.e. the processing or manufacturing or consumption region). The value of the physical commodity might be much lower in a place where it is produced, mined or refined, which tends to be far away from places where it is actually being put into use in processing or manufacturing facilities, or where it may be consumed If a storage location full of the same physical commodity is located in or near a processing or manufacturing or consumption region, it is significantly more valuable to the end user due to the relative ease with which the commodity can be physically available for processing or manufacturing or consumption and the low costs involved. In this regard, the geographic location of the physical commodity can have a major impact on the price of the commodity.
U.S. Patent Publication No. 2005/0044022A1 provides systems and methods for securitizing a commodity, wherein a commodity trust is provided by a trustee for a particular commodity and commodity shares are backed by the trustee's custody of the actual commodity. Further, after confirmation of the receipt of the commodity, an amount of commodity shares is issued by the trustee, which is equal in value to the value of the commodity. In that patent application, however, the commodity is focused on precious metals or other similar products, which are more valuable in smaller quantities and can be easily transported to other locations and stored. The products covered are generally custodied, or stored, in one or few locations without accurately reflecting the quantity of the precious metals. Also, the prices of precious metals generally do not reflect locational premiums, or if they do reflect locational premiums, those locational premiums are not significant, because the mass and volume per dollar is very small as compared to the physical commodities with significant locational premiums. Generally, these precious metals are simply valued based on market prices that do not vary significantly by location.
Currently, an investor who is not a major participant in a physical commodity production, manufacturing or consumption process, for a particular commodity, can only invest in that physical commodity by either buying specific futures or selling specific futures that reference such commodity on an exchange. However, this type of investment may be inefficient, for a number of reasons, but in part due to the lack of such investor's ability to take delivery of or deliver the underlying commodity. Therefore, an investor would be required to continually trade out of one futures contract that is close to its maturity date and into another futures contract with a later maturity date in order to provide continuous exposure to the market, and might incur additional costs in such undertaking. Alternatively, the investor can invest in an index that replicates the performance of such a trading strategy in the futures, but may still end up with similar economic performance. Another material disadvantage of such a futures-based trading strategy is that the performance of the investment strategy is based on the prices of the futures contracts themselves rather than the price of the underlying commodity. These futures contract prices might differ from the spot value of the underlying commodity. These existing investment methods also do not reflect direct or indirect beneficial ownership of the underlying commodity but rather represent exposure to futures contracts on an unsecured obligation basis or secured by assets other than the physical commodity. This can sometimes introduce additional market dynamics that can affect the performance of the overall strategy.
Therefore, a need exists in the market to provide an ETF that offers an exposure to indirect ownership of the actual commodity, to facilitate a pure current exposure to the physical commodity, particularly for any physical commodity that involves geographical premium (i.e., a price more reflective of the actual value of the relevant commodity). Such physical commodities present associated challenges relating to the physical commodities that must be addressed in order to provide a cost-effective method for providing ETFs for investing in such physical commodities relative to the prior art methods.
Moreover, generally, the physical commodity stored at a storage location includes a certain number of lots which are owned by various owners. These lots have to be tracked and managed in order to convert them into ETF shares and to transfer ownership of the ETF shares from one owner to another. Therefore, a need exists in the market to provide for the efficient management of the storage location of the physical commodity in order to provide for the accurate and fair valuation of the ETF shares based on the physical commodity.